Infrastructure top out unlikely to stifle Perth CBD investment

PERTH, 7 June 2013 – The plateauing of Western Australia’s infrastructure development phase is expected to have minimal impact on investment in Perth’s CBD office market, according to Jones Lang LaSalle.

Jones Lang LaSalle’s Managing Director, WA John Williams says that while vacancy rates would increase marginally in the short term – largely driven by sublease space being brought to the market – any increase would likely be capped, given the limited levels of new supply due for completion by 2015.

“We need to put things into perspective,” said Mr Williams.

“Firstly, in excess of $1 billion of Perth CBD assets will have changed hands by 30 June this year – which is a record for total value of transactions in any calendar year. With the exceptionally strong demand from buyers, 2013 will undoubtedly be a stand-out year for asset transactions in the CBD.

“Notable also is the size of individual deals. Already in 2013 there are two deals in excess of $400 million, being Kings and Raine Squares, while Allendale Square will transact to Mirvac at $231 million.

“Secondly, Perth continues to have the lowest rate of any Australian capital city, even with a vacancy rate of 6.5%.”

On the future, Mr Williams said that investors had previously been concerned about the liquidity of larger assets in the Perth market, and that it was perceived that a single asset in excess of around $200 million in a market the size of Perth would be difficult to on-sell.

“This attitude has changed, and investors are clearly more confident in the sustainability of the Perth market.

“While Australian headlines are highlighting the negative impact from the ‘end of the mining boom’ and we in Perth focus on the difference in the WA economy since mid-2012, offshore capital has the benefit of a different perspective on the current economic climate.”

Mr Williams said that investors understood that while mining sector investment fluctuated and directly impacted the office market, they also recognised that mining investment was now dominated by gas producers, and that cities like Perth with energy as a major resource typically delivered long-term sustainable growth.

“Consequently, and despite the fact that this investment will plateau rather than increase, it will remain at levels greater than all other Australian states combined.

“The major source of capital for the large transactions is offshore investors. However, we have seen a tendency for these parties to partner with local institutions,” said Mr Williams.

Mr Williams predicted that overall, investment spending would remain at levels greater than all other Australian states – even though it would plateau rather than increase.

As evidenced by the transactions so far, investors’ focus has been on core, premium and A grade assets with long Weighted Average Lease Expiries (WALEs) that represent low risk. However, with competition from buyers such as the Listed Property Trust sector, it is likely that investors will very quickly need to move up the risk curve to satisfy their requirements to invest.

“An additional factor working in favour of the market was the recent performance of the Australian dollar, which will add to the pool of buyers.

“Private investors from Asia have always been active in the Perth market and several have stated that they will be buyers if the dollar settles below 95 cents.

“In addition to deals concluded in 2013, a 50% interest in Exchange Plaza will shortly hit the market with a price expectation of circa $180 million, while assets such as the Telstra Building in Stirling Street at circa $80 million are also under consideration from the active pool of investors.

“As a consequence of the level of capital looking to invest, we forecast a continuation in the tightening of yields despite an increasing vacancy rate and expectation of reduction in rent,” he said.

Mr Williams said that recent transactional activity had confirmed Perth’s CBD office market as a target for investors.

“Investors have confidence in the ability for business to underpin demand for accommodation as the city grows and maintains a competitive level of income growth over the long term. Competition for assets will drive down yields and deliver capital growth in the short to medium term.” ​